Environmental Impact Investing: Attracting Dollars & Delivering Results. 2 Experts Share Strategies

Environmental Impact Investing: Attracting Dollars & Delivering Results. 2 Experts Share Strategies


THIS WEEK ON WEALTHTRACK, OPPORTUNITIES IN
GREEN BONDS AND STARTUPS WITH IMPACT FROM CALVERT’S VISHAL KHANDUJA AND I(X) INVESTMENTS
CHRISTINE HARADA… THEY ARE NEXT ON CONSUELO MACK WEALTHTRACK. HELLO AND WELCOME TO THIS EDITION OF WEALTHTRACK,
I’M CONSUELO MACK. REMEMBER THE EXPRESSION “FOLLOW THE MONEY”
FROM THE DEEP THROAT CHARACTER IN ALL THE PRESIDENT’S MEN? IT TURNS OUT BOB WOODWARD
AND CARL BERNSTEIN’S ANONYMOUS SOURCE IN THE NIXON WHITE HOUSE NEVER ACTUALLY UTTERED
THE PHRASE, BUT WE HAVE TAKEN THE DIRECTIVE TO HEART AT WEALTHTRACK. WE ARE FOLLOWING
THE MONEY FOR YOU. WE ALSO WANT TO “SHOW YOU THE MONEY,” TOM CRUISE’S MANTRA IN
JERRY MAGUIRE. WE CAN DO BOTH WITH ONE INVESTMENT APPROACH. SOCIALLY RESPONSIBLE INVESTING. ALSO KNOWN AS ESG FOR ENVIRONMENTAL, SOCIAL AND GOVERNANCE,
SUSTAINABLE OR IMPACT INVESTING IT IS ATTRACTING MASSIVE AMOUNTS OF INVESTOR DOLLARS – FOLLOW
THE MONEY- AND IS PERFORMING AS WELL IF NOT BETTER THAN NON-ESG INVESTMENTS – SHOWING
YOU THE MONEY! THE LATEST EVIDENCE COMES FROM MORNINGSTAR. IN ITS MOST RECENT “SUSTAINABLE FUNDS U.S. LANDSCAPE REPORT” MORNINGSTAR FOUND THAT
THE ESG FUND GROUP “ATTRACTED RECORD NET FLOWS IN 2018,” ITS SIXTH YEAR OF “EVER
HIGHER ANNUAL NET FLOWS” WHILE NON-ESG U.S. FUNDS “COLLECTED LESS THAN HALF THEIR HISTORIC
ANNUAL… AVERAGE” OF THE LAST 10 YEARS. AND SUSTAINABLE FUNDS RELATIVE PERFORMANCE
REMAINED STRONG, EVEN IN THE CHALLENGING ENVIRONMENT OF 2018. 63% OF SUSTAINABLE FUNDS FINISHED IN THE TOP HALF OF THEIR RESPECTIVE MORNINGSTAR CATEGORIES. THAT HELPED 58% OF THEM RANK IN THE TOP HALF IN THE TRAILING FIVE-YEAR PERIOD. MORNINGSTAR ITSELF HAS CREATED 56 UNIQUE ESG SCREENED INDEXES. ITS MOST RECENT ANALYSIS
FINDS THAT PERFORMANCE ACROSS THE RANGE OF THEM TENDS TO BE STRONG. 41 OF THE 56 ESG INDEXES, THAT’S 73% OF THEM OUTPERFORMED THEIR NON-ESG EQUIVALENTS
SINCE INCEPTION. MORNINGSTAR REPORTS THAT THE RESULTS ARE EVEN
MORE ENCOURAGING WHEN MEASURING THEIR EXPOSURE TO VARIOUS RISK FACTORS LINKED TO A POSITIVE
LONG-TERM INVESTOR EXPERIENCE. THE STUDY CONCLUDES THAT “MORNINGSTAR ESG
INDEXES TEND TO SELECT COMPANIES THAT ARE LESS VOLATILE AND POSSESS STRONGER COMPETITIVE
ADVANTAGES AND HEALTHIER BALANCE SHEETS THAN THEIR NON-ESG EQUIVALENTS.” ONE GROWING SUBSET OF ESG INVESTING IS KNOWN
AS IMPACT INVESTING WHICH MORNINGSTAR DEFINES AS INVESTING EXPLICITLY FOR MEASURABLE SOCIETAL
OR ENVIRONMENTAL IMPACT ALONGSIDE FINANCIAL RETURN. OUR TWO GUESTS ARE SEASONED PRACTITIONERS OF IMPACT INVESTING. CHRISTINE HARADA IS THE PRESIDENT OF I(X) INVESTMENTS, A PRIVATELY HELD COMPANY THAT
INVESTS IN EARLY STAGE COMPANIES “GENERATING SOCIAL AND ENVIRONMENTAL IMPACT ALONGSIDE
STRONG FINANCIAL RETURNS.” CO-FOUNDED IN 2015 BY WARREN BUFFETT’S GRANDSON,
HOWARD WARREN BUFFETT, I(X) IS A HOLDING COMPANY MODELED AFTER BERKSHIRE HATHAWAY WITH A GOAL
TO GO PUBLIC AS A PERMANENTLY CAPITALIZED OPERATING COMPANY .
IT IS TARGETING AREAS SUCH AS CLEAN ENERGY, SUSTAINABLE AGRICULTURE, WATER SCARCITY, AND
GREEN REAL ESTATE. HARADA, AN AEROSPACE ENGINEER BY TRAINING
WAS THE FEDERAL CHIEF SUSTAINABILITY OFFICER FOR THE U.S. DURING THE OBAMA ADMINISTRATION
AMONG OTHER TOP LEVEL FEDERAL JOBS. SHE ALSO WORKED IN THE PRIVATE SECTOR FOR TOP CONSULTING
FIRMS. VISHAL KHANDUJA IS PORTFOLIO MANAGER OF THE
SOCIALLY RESPONSIBLE CALVERT BOND FUND AND THE CALVERT GREEN BOND FUND, WHICH IS DIRECTLY
TARGETED AT ENVIRONMENTAL IMPACT INVESTING. CALVERT, FOUNDED IN 1976 IS A PIONEER IN ESG
INVESTING AND OFFERS BOTH ACTIVE AND PASSIVE SOCIALLY RESPONSIBLE STRATEGIES. CALVERT WAS
A FOUNDER OF THE UNITED NATIONS PRINCIPLES FOR RESPONSIBLE INVESTMENT WHICH NOW HAS 2,000
THOUSAND LARGE INVESTORS PARTICIPATING, REPRESENTING MORE THAN $90 TRILLION IN ASSETS GLOBALLY. I BEGAN THE INTERVIEW BY ASKING THEM HOW THEY DEFINE IMPACT INVESTING. CH: So, at i(x) investments we define impact
investing as aligning our dollars with our values, ensuring that we’re producing top-tier
market returns. We completely repel the myth that we have to concede returns in order to
be able to make a positive social and environmental impact. CM: So, in fact, as I said in my introduction,
it turns out that impact investing and in many cases, socially responsible investing in many cases
that funds that invest with social responsible goals in mind actually outperform those that
don’t. So, I think that basically that question should have been laid to rest; So Vishal,
how do you define impact investing? VK: At Calvert, we try to break it down for
our clients into these four pillars of responsible investments is what we call them. We lead
with performance. As fiduciary of client capital, we want to make sure that we are delivering
the right performance both risk-adjusted and and long-term consistent performance to our
clients, depending on the strategy that they invest in. The second one is research. We spend a lot of time and resources on researching companies
not only from the financial aspect of it or valuation aspect of it but also researching
companies on their ES&G, environment, social and governance aspects; The third pillar is
engagement. We engage with these companies on both the credit aspect as well as the ES&G
aspect, and then the last pillar is impact reporting. When we go back to our clients,
we not only report on our performance. This is how your portfolio performed. These are
the reasons. We also report on your impact. These are the positive or less negative impacts
that your portfolio had versus what you could have invested in a passive benchmark. CM: So, what’s interesting is Calvert is
a pioneer in ESG investing. They’ve been doing it for decades, and i(x) investments
is relatively new. I mean it launched in 2015, and also you are focusing more on startup
companies. Is that correct? CH: Yes, that’s correct. So, we seek to
invest in areas of human need, so for example things like renewable energy, green commercial
real estate, gender equality, things of that nature, and so a lot of our companies
we’re really looking for the intentionality and the real integration of social and environmental
impact in the mainline business. It’s still a relatively newer way for companies to operate
and so, henceforth, a lot of our investments tend to be on the earlier side. CM: Your model is based on Berkshire Hathaway
not surprisingly since Howard Warren Buffett, the grandson of Warren Buffett launched this,
is a co-founder. But as far as you stress performance in looking at impact as well in new companies,
I mean how do you measure performance? CH: So, like many other VC and private equity
firms, we evaluate based on what we project in the financial performance of the various
companies. However, in addition, we also assess the impact rate of return. That’s a methodology
that Howard Warren Buffett had developed based on mainly a lot of the work that Berkshire
Hathaway has done over the years with respect to long-term value investing. He’s now re-crafted that
into social value investing and implementing, integrating more of that focus. So, we evaluate our investments based on not only the financial returns, the capital IRR,
but also the impact rate of return as well. CM: So, the impact rate of return, that’s
the IRR that he’s identified in his book, Social Value Investing. You’re investing
in companies that have been in existence for a long time. They’ve got track records and
everything else. So, what do you look for in companies? Specifically, you’re looking
at their bond issuance. VK: That’s correct. My focus is fixed income
investments, so yes, we’re looking at balance sheets of these companies, and we’re doing
it through the public fixed income market, so eventually offering mutual funds, separate
accounts and doing it through the public fixed income markets. The concept or the philosophy is exactly what Christine pointed out. We are trying to look
for not only companies’ intentionality of how are you going to perform and outperform
your peers, in the peer group that you are. CM: Again, that’s the financial. VK: That’s the financial aspect. CM: That’s the fundamental credit analysis. VK: Exactly, and Then we ask our ESG analysts. So, we have a team of in-house analysts who
are focused on the ESG aspects of the company. CM: Christine, You do have some investment
themes. So, tell us what the themes are, what the activities the companies are involved
in that you are looking to invest in. CH: So, we fundamentally seek to create a
better planet. We’re investing in areas of human needs, areas like for example combating
climate change, so investing in renewable energy, converting municipal solid waste into
jet fuel, into renewable energy and green commercial real estate. We’re also investing in areas around gender equality, unleashing the economic productivity
of women around the world. Not so much with a lens on women entrepreneurs per se. I think
that’s a fantastically valid investment thesis. We really want to unleash the women,
if you will. We’re also looking into water as well as food and agriculture and sustainable
materials as well. CM: So how do you find the companies that
you end up investing in? CH: So, we source a number of our potential
deals through a variety of means. So, one is around the families that have invested
in the holding company. They are fantastic resources for potential opportunities and great ideas
and innovators around the world. CM: So, they have invested in i(x) investments
to begin with. So, they’re almost like your research team. They’re not on staff. CH: That is correct. CM: You get ideas from them because they are
interested in impact investing, and that’s what you’re doing. CH: Absolutely, yes, and then secondly through our own network ourselves, given my experience
in the administration and government and sustainability for a number of years. I am very well familiar
with a number of different kinds of technologies and players out there. Additionally, the rest
of our team is a fantastic collaborative mosaic of folks with different skill sets from different
fields, and so they too have opportunities that they’re able to source. CM: How many companies have you invested in,
number one, and have you found that there are certain themes that you are investing
more heavily in than others? CH: i(x) investments has made 15 investments
thus far, and for the moment we’ve tended to invest more in the areas of addressing
climate change, so we have renewable energy, sustainable aviation fuels, green commercial
real estate. We’re also looking to further expand upon the work that we’d like to do
in food and ag tech, given the impending food crisis that we’re about to face say in the
next 15, 20 years. CM: So, they have to be part of the solution,
as opposed to just being good governance, good social policies. I mean you’ve got
a very specific focus. Can you just elaborate a little bit more on that for us? CH: Sure, absolutely. So, for impact investing for us, we do it much more as impact is the
alpha generator. It is the reason why the company exists. It is also the reason why
it’s producing fantastic financial returns. It ends up building on I think a lot of the
work that’s been done to date in the field of ESG investing. A lot of the issues are
very much still consistent across both fields if you will. I think that impact investing
is a much more direct way of being able to funnel your capital into addressing some of
the very critical things that we need to take care of. CM: Let me ask you, Vishal because you’re managing two portfolios of Calvert, a bond
fund which has been around for a long time which is an ESG bond fund. Specifically you’re also managing
a much more focused, the Calvert Green Bond Fund. You’re focusing more on what Christine is
talking about at i(x) investments. VK: That’s correct. So Green Bond Fund is
directly focused on environmental impact, and it goes and seeks those opportunities
in public financial markets or public fixed income markets to be precise to seek those
opportunities and to have tangible and measurable impact not only from the performance side
but also from the environmental benefit side. So commercial real estate is a big investment
that we have. Investing not only just green buildings but buildings that are old and need a lot
of reinvestment to get much more energy and water-efficient. Also invest in infrastructure bonds where you are solving the infrastructure, water
infrastructure issues. So, we invested in this DC Water bond which is basically trying
to solve the sewer issues that happens when there are floods or when there is stormwater
that’s mixed up in the sewer and goes into reservoirs. So, there is a Clean Rivers project
that bond directly financed. So, infrastructure projects like those. Then renewable energy
is a big allocation strategy as well like a company like Avangrid is …
CM: What is Avangrid? What does that do? VK: It’s a big utility and energy service
company, and not only just issuing green bonds that is lacking financing, some commercial
wind projects or solar projects, but they have as a company made their goal by 2035
to become carbon neutral, and they have six shorter-term goals that help them reach that. So not only the company is doing a lot to improve their bottom line, to be very dominant
in the sector of renewable energy but also helping companies like Nike to reach their
goal of 100 percent renewable energy in their commercial operations. So that company does
not only have one singular focus of financial returns. It does. Yes, that it a focus that shareholders
attach to it, but also, it’s doing it in a very responsible way which makes investors
align their values with that company. CM: So, I’m looking at some of the themes
that you had mentioned to me as well. Low carbon transport is another issue, and a lot
of the bonds that you’re investing in are asset-backed securities. So, explain
what that means and about the lowering of carbon transport. VK: So, asset-based securities are basically bonds that pay you coupon in principal but
are backed by a specific pool of either loans or leases that are directly paying or responsible
to pay you your coupon and principal. So for example, how we are using this sector
of the public fixed income market asset-backed securities is to access low carbon transport,
Toyota securities, or Toyota issued I think 9
in 2014 an asset-backed security which was not only Toyota meets our basic minimum ESG
criteria, the explanation I went through that that we
have ES&G of that entire company, but then we got access to this pool which only finances
hybrid leases. CM: Hybrid vehicles? Right. VK: So, you’re picking up the most energy-efficient portion of Toyota, and you’re backing your
collateral with that. Now that was in 2014. We’ve come a little longer way from then. The definition of green has become a little bit more darker green if you will. CM: Darker green means what? Better, richer? VK: Darker green is better, richer, more energy
efficient. So, it’s not only hybrid vehicles. Now we have asset-backed security which backs
all-electric vehicles from Tesla. So, you’re pushing that market to issue even further
into that green spectrum if you will. I strongly believe that unless you can produce competitive
returns with investments, unless you can bring those two aspects of financial materiality
and fiduciary duty and performance along with the ES&G or impact investors unless you can
bring those two together, I think it falls off pretty quickly. CM: So, when Christine was in the Obama administration
as the chief sustainability officer for the federal government, she was instrumental in
actually having the fleet of federal vehicles, over 600,000 of them, transformed, transferred
into hybrid or electric vehicles. Right? CH: That is correct. That was a massive effort
that we wanted to undertake. Obviously, climate change and Paris Climate Accord was very important
to us as a top priority in the Obama administration, and we thought better place to set an example
than within our own operations. It was a great challenge. We had a number of aging vehicles
as well as sedans, and the variety of vehicles that we have is rather tremendous, and so
thinking through all the mission needs, the infrastructure needs, the financing, and the
legal issues, to address all that was a big challenge. CM: Especially I’m thinking of your portfolio
of startups or these young companies that are solving these various challenges. How
are you measuring their performance, and what universe are you comparing them to? CH: We look at it in two ways. So, first is
around Howard’s methodology for impact rate of return, and how can you best allocate the
capital in that particular sector? Secondly, we’re also comparing it against the existing
business base. So, for example, within our Commercial Real Estate Fund, we have the world’s
first Green Commercial Real Estate Fund that’s focused on reducing carbon, and that is the
primary strategy of that particular fund. So, say for example comparing returns of that
particular fund against other commercial real estate funds is certainly an area that we’re
looking at as well. Other areas, so around renewable energy comparing the performance of our sustainable
aviation fuel’s performance both from a carbon reduction perspective as well as from
a financial returns perspective is an area that we’re diving into as well. we have
a fairly diversified set of holdings. Some of them are operating companies, direct operating
companies. So, for example, our sustainable aviation fuel company is a company. We also
have a number of funds. We also have a Public Equity Strategy for gender equality, and we
also have funds to help with acceleration of newer technology companies. So largely
they can be categorized as private equity funds. CM: Measuring the green bonds. There has been
some controversy about green bonds that they’re gray bonds, or they’re brown bonds or whatever. That some issuers are saying that it’s a green bond, and it turns out it’s not at
all. Is measuring what these bonds actually are, that they are in fact green, is that
an issue? How is that being resolved? VK: So, we take measurement both of impact
as well as performance and credit, all the traditional aspects of an investment, up to
the same level of scrutiny if you will. So internally the way we work, we have a separate
team of ESG analysts as I explained before. These analysts are also responsible for looking
at every security coming into the portfolio, looking at the ESG aspects, looking at the
direct impact aspects for the green bond strategy. At the time of issuance, there is a pretty
formal process that an analyst is following, talking to the company management, talking
to the sustainability officer, making sure that we understand where the user proceeds
are going to be, what projects there’s going to be, and then what is the reporting going
to be? Is it going to be every six months? Every one year? Just like our credit analysts
will be talking to the Treasurer or the CFO of the company, asking them for periodic quarterly
statements and earnings releases. Our ESG analyst is approaching the sustainability officer. CM: Oh, interesting. VK: Asking for those releases periodically,
and we will take active decisions where we’ve not had that, but it’s hypothetical. At least we have the process laid out where if the report doesn’t come in or we feel
a lack of transparency from the ESG or the impact reporting side of it from a company,
that investment will become ineligible for that strategy. Some of the private companies
that are not issuing or not able to issue corporate bonds in our universe, we will access
them or provide financing with them through the asset-backed market. Now we talked about
two examples of bigger companies. CM: Toyota and Tesla. VK: Toyota and Tesla, but there are companies like Solar Mosaic. It’s a consumer finance
company that focuses only on underwriting loans to personal homeowners to put solar
panels on the roof. The company has a really good combination of people who work in consumer
finance, so they know how to underwrite homeowners or loans to homeowners, people who work in
the solar/tech industry, so they truly understand the type of solar panels coming in, what the
eligibility is, what the repairs and maintenance needed on the solar panels are. And the combination of those two forces is bringing up a company where you’re focused
on not only providing a financially positive outcome to the homeowner that is displacing
a current utility bill to a much lower monthly payment and long-term payment by having a
solar panel on the roof. But also saving the environment or having a positive impact on
the environment. So private companies … CM: This is Solar Mosaic. Right? VK: Solar Mosaic. So private companies like that could come to the asset-backed market
to ask for financing from the fixed income side. CH: So, at i(x), while we do a lot of investments
here in the United States, we’re also looking to export a lot of our technologies overseas. So, for example, our waste fuel operating company which seeks to convert municipal solid
waste into sustainable jet fuel, we’re basically taking technology that’s been developed
and proven out here in the United States and taking that to Latin America. So, we’re
looking at opportunities to help address both the waste management crisis throughout the
world in places like Panama and Colombia as well as addressing the carbon pollution by
developing further, more sustainable aviation fuels. CM: At the end of every WEALTHTRACK we ask each of our guests for their one investment. If you could only make one investment to put into a long-term diversified portfolio, what
would it be? So Vishal, what would you have all of us own in a long-term diversified portfolio? VK: Given where we are currently in the U.S.
credit as well as the economic cycle, I strongly believe that the front end of the U.S. yield
curve, meaning the zero to five-year sector, given how flat or inverted at this point as
we talk curves are, it’s prudent to be in that part of the yield curve for a diversified
fixed income portfolio. CM: One to five-year maturities. VK: One to five-year maturity. That’s a sweet spot at this point along with on the
impact side renewable energy at this point given the longer-term effects and the amount
of investments that you need in sustainability. A combination of those two is my best spot
at this point. CM: Christine, what would your advice be for
again just own some of. Everyone should own some of it in a long-term diversified portfolio. CH: I think investors really should be looking
at those investments that will help reduce greenhouse gas emissions. That can be anything
from commercial real estate and reducing the carbon pollution from commercial real estate
buildings. It can also include electrified transportation, whether that be through mass
transport or electric vehicles or charging infrastructure. CM: Great. Thank you both so much for being with us on WEALTHTRACK. CH: Thank you. VK: Thank you very much. AT THE CLOSE OF EVERY WEALTHTRACK WE TRY TO
GIVE YOU ONE SUGGESTION TO HELP YOU BUILD AND PROTECT YOUR WEALTH OVER THE LONG TERM. THIS WEEK’S ACTION POINT IS: CHECK OUT “SOCIAL VALUE INVESTING: A MANAGEMENT FRAMEWORK FOR
EFFECTIVE PARTNERSHIPS BY HOWARD WARREN BUFFETT AND WILLIAM EIMICKE. PUBLIC, PRIVATE, PHILANTHROPIC PARTNERSHIPS
CAN WORK. NEITHER SECTOR CAN SOLVE THE CHALLENGES FACING SOCIETY HERE AND AROUND THE WORLD BY
THEMSELVES. WORKING TOGETHER THEY HAVE A MUCH BETTER SHOT AT ADDRESSING BIG ISSUES SUCH
AS INEQUALITY, CLIMATE CHANGE, AFFORDABLE HOUSING, HEALTHCARE, AND FOOD INSECURITY
THERE ARE EFFECTIVE WAYS TO PARTNER AND INEFFECTIVE ONES. BUFFETT AND HIS CO-AUTHOR SHOW EXAMPLES
OF BOTH. THIS BOOK IS TARGETED TO MANAGERS FROM ALL
SECTORS, BUT IT IS ALSO A USEFUL INTRODUCTION FOR THOSE OF US INTERESTED IN COMBINING BERKSHIRE
HATHAWAY STYLE VALUE INVESTING WITH POSITIVE SOCIAL IMPACT. IN OUR EXTRA FEATURE THIS WEEK ON WEALTHTRACK.COM, HARADA, AND KHANDUJA REVEAL WHAT LED THEM
TO THEIR DEDICATION TO SOCIALLY RESPONSIBLE INVESTING. NEITHER ROUTE WAS A STRAIGHT SHOT. IN THE MEANTIME WE HOPE YOU ENJOY FOLLOWING US ON FACEBOOK, TWITTER, AND OUR YOUTUBE CHANNEL. THANK YOU FOR WATCHING. HAVE A GREAT WEEKEND AND MAKE THE WEEK AHEAD
A PROFITABLE AND A PRODUCTIVE ONE.

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5 thoughts on “Environmental Impact Investing: Attracting Dollars & Delivering Results. 2 Experts Share Strategies

  1. Why is Wealthtrack censoring comment sections on select recent videos such as Robert Kessler? Trying to shape the narrative beyond your content and comment responses is unprofessional and amateurish.

  2. This sounds like such a scam, i bet a good 50% of these investments are just putting lipstick on a pig. How arrogant to suggest that we can grow our way out of the social and environmental nightmare people like Warren Buffett have promoted and prospered from. If we think about the damage to the environment as a debt, we can not pay that down with more debt, even if it is at better rate

  3. Very interesting. Impact investing is a new great trend. If you want to know more, welcome to my channel – Galileo Impact Stories.

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